Taxes are the major source of mobilizing internal resources of an economy. Bangladesh revenue structure has been burdened by taxes from indirect sources for long time and usually characterized by heavy import and excise duties. To cope with the challenge due to globalization, government of many such countries has to cut down such duties and levies. It seems that government might have to collect more money either through VAT (Value Added Tax) or from direct taxes. In Bangladesh VAT introduced in 1991 by replacing the sales taxes is still known as the vital reform in Bangladesh revenue structure. The remaining potential sector is the income taxes sharing almost all taxes coming through direct sources. Tax base is too narrow and the tax law is full of exemptions and allowances. Agriculture sector provides employment for around 60percent of the population contributes only 25 percent of GDP and virtually pays little in the form of income tax. There are many affluent people lying in the category of agricultural income and more such people avoiding taxes showing their entire income as a means of agriculture. However share of direct taxes has averaged a little improvement but not attained expected consistency as needed. Thus to combat with the upcoming challenges of globalization and expected rapid shrinking of tariffs, it seems now to overhaul the tax structure and to concentrate more on widening the tax base for VAT and income taxes.
Tax is a compulsory levy imposed by the Government. People pay taxes to the Government on the basis of what they earn, what they own and what they purchase. A tax is a compulsory payment levied on the persons or companies to meet the expenditure incurred on conferring common benefits upon the people of a country. Two aspects of taxes follow from this definition:
A tax is a compulsory payment and no one can refuse to pay it. Proceed from taxes are used for common benefits or general purposes of the state. Classification Of Tax:
On the basis of tax rate
.Progressive Tax: A tax that takes a larger percentage from the income of high-income earners than it does from low-income individuals. Basically, taxpayers are broken down into categories based on taxable income; the more one earns, the more taxes they will have to pay once they cross the benchmark cut-off points between the different tax bracket levels. Proportional Tax: A tax system that requires the same percentage of income from all taxpayers, regardless of their earnings. A proportional tax applies the same tax rate across low-, middle- and high-income taxpayers. The proportional tax is in contrast to a progressive tax, where taxpayers with higher incomes pay higher tax rates than taxpayers with lower incomes Regressive Tax: A tax that takes a larger percentage from low-income people than from high-income people. A regressive tax is generally a tax that is applied uniformly. This means that it hits lower-income individuals harder. On the basis of impact and incidence
Direct Tax: A tax that is paid directly by an individual or organization to the imposing entity. A taxpayer pays a direct tax to a government for different purposes, including real property tax, personal property tax, income tax or taxes on assets. Direct taxes are different from indirect taxes, where the tax is levied on one entity, such as a seller, and paid by another, such a sales tax paid by the buyer in a retail setting. Indirect Tax: A tax that increases the price of a good so that consumers are actually paying the tax by paying more for the products. An indirect tax is most often thought of as a tax that is shifted from one taxpayer to another, by way of an increase in the price of the good. Fuel, liquor and cigarette taxes are all considered examples of indirect taxes, as many argue that the tax is actually paid by the end consumer, by way of a higher retail price. On the basis of base
Single Tax: A tax to be levied on a single item (as real estate) as the sole source of public revenue Multiple Tax: A taxation principle referring to income taxes that are paid twice on the same source of earned income. Multiple tax occurs because corporations are considered separate legal entities from their shareholders.
TAX SYSTEM OF BANGLADESH
Major heads of tax-revenues of Bangladesh are as follows:
A. Taxes on Income and Profit
Income tax-Companies2.Income tax-Other than Companies
B. Taxes on Property & Capital Transfer
Estate Duty and Gift Tax2.Wealth Tax3.Narcotics Duty4.Land Revenue5.Stamp duty-non-judicial6.Registration C. Taxes on goods and services
Value Added Tax (VAT)
Supplementary Duty (On luxury items and in addition to VAT) Taxes on Vehicles6.Electricity Duties
Other Taxes and Duties (travel tax, turn over tax, etc.)
Major heads of non-tax revenues are as follows:
D. Interest, Dividend and Profit
E. General Administration and Services
F. Social and Community Service
G. Economic Services
H. Agriculture and Allied Services
I. Transport and Communication
J. Other non-tax revenue
K. Capital Revenue
Direct & Indirect tax
1. DIRECT TAX CONTRIBUTES ONLY SMALL PORTION OFTOTAL TAX REVENUE: Tax revenue structure of Bangladesh can be divided into direct and indirect taxes. A direct tax is paid by a person to the revenue authority. Direct tax is borne by the tax payer and cannot be passed on to any person, whereas indirect tax is passed on by the tax payer so that the burden of the tax is ultimately borne by another, for example Value Added Tax(VAT) which, although paid by the businessmen, is passed on to the customers. That is, indirect tax is charged on consumption in one way or another. Indirect tax is regressive because it takes a higher portion of a poor person’s income than of a reach person’s. VAT is the same for all people. Indirect taxes do not develop any civil consciousness in the minds of tax payers because nobody feels that he is paying a tax as it is concealed in price, whereas direct tax create a civic consciousness among the tax payer; they feel that they are contributing towards the state expenditure. In the case of direct taxes, the relation between the tax payer and the revenue authorities is direct personal. But there is an indirect relation between the tax payer and tax authorities in the case of indirect taxes, for the taxes are collected unofficially through the agency of merchants.
2. PREDOMINENCE OF INCOME TAX AMON THE DIRECTTAXES:
According to the income tax Ordinance, 1984, income may generate from different sources, namely, salary, business & profession, house property, interest on security, agriculture, capital gains, and other sources.
3. NEGLIGIBLE DIRECT CONTRIBUTION OF THEAGRICULTURAL SECTOR TO TAX REVENUE:
Direct taxation on agricultural sector normally takes two forms; land revenue tax and tax on agricultural income. This sector accounted for more than 50% of total direct tax revenue in the early sixties, but now agricultural income tax is very negligible. It accounts for only0.01% of the GDP, although the average contribution of agriculture to the GDP is 35%.Agriculture, more specifically, non-farm activity still remains an untapped source of revenue to the government. In most cases, income from agriculture does not exceed the ceiling of non-taxable limit primarily due to subdivision and fragmentation of holdings for which income is distributed to different hands. Furthermore, tax administration is not expanded down to village, and therefore, current information on this source of income cannot be easily collected for making assessment. Placing more emphasis on the collection of income tax from agriculture may augment the price of our main food and may create socio-political unrest. Government does not like others to do politics with food. High cost of collection of agricultural tax may be another consideration. All these factors may contribute to the poor tax performance of agriculture sector.
4. HEAVY RELIANCE ON DIRECT TAX BASED:
Bangladesh relies too much on indirect taxes, which accounts for nearly 80% of the total tax revenue. On the other hand, the developed countries rely less on indirect taxes and more on direct taxes. For example, indirect taxes account for 45% of total tax revenue of UK (Stain,1997). Our dependence on indirect taxes is increasing gradually. Indirect tax is comprised of mainly three types: Value Added Tax (VAT), Customs Duty, and Excise duty. The government of Bangladesh introduced the VAT system in 1991-92. It was imposed at the import cum manufacturing stage and replaced the prevailing excise duty on domestic production at the production stage and sales tax on imports at the import stage. It is also imposed on domestic services and its coverage of domestic goods has gradually increased in the recent times. Value added is defined as the difference between the value of a firm’s sale (outputs) and purchases of inputs
5. IMPORT DEPENDENCY OF INDIRECT TAX BASE:
Our tax structure is heavily dependent on imports. It is, however, obvious that the indirect taxes on international trade composed almost entirely of taxes on imports, account for the lion’s share of our tax yield. That is, the system of indirect taxation in Bangladesh is heavily dependent upon import trade. Total import-based indirect tax is around 50% of total tax revenue.
6. POOR TAX- GDP RATIO:
The ratio of tax revenue to GDP is an indicator of the government’s performance ingenerating resources at its disposal through the taxation machinery. The higher this ratio, the higher the effectiveness of the taxation system in terms of revenue yields. The contribution of tax revenue to the GDP of Bangladesh was less than 4% in FY 1972-73 against 9.35% in1995-1996. As per Periodic Economic Update of the World Bank of June 2002, tax revenue – GDP ratio of Bangladesh is 9.7% in FY 2001-02. The Government claims that the current tax revenue- GDP ratio is 10.40% and is expected to increase to 12% within the FY 2004-05.
Role of Tax in the Economic Development of a Country:
Tax is a contribution exacted by the state. It is a non penal but compulsory and unrequited transfer of resources from the private to the public sector, levied on the basis of predetermined criteria. The classical economic were in view that the only objective of taxation was to raise government revenue. But with the changes in circumstances and ideologies, the aim of taxes has also been changed. These days apart from the object of raising the public revenue, taxes is levied to affect consumption, production and distribution with a view to ensuring the social welfare through the economic development of a country. For economic development of a country, tax can be used as an important tool in the following manner: 1. Optimum allocation of available resources:
Tax is the most important source of public revenue. The imposition of tax leads to diversion of resources from the taxed to the non-taxed sector. The revenue is allocated on various productive sectors in the country with a view to increasing the overall growth of the country. Tax revenues may be used to encourage development activities in the less developments areas of the country where normal investors are not willing to invest. 2. Raising government revenue:
In modern times, the aim of public finance is not merely to raise sufficient financial resources for meeting administrative expense, for maintenance of low and order and to protect the country from foreign aggression. Now the main object is to ensure the social welfare. The increase in the collection of tax increases the government revenue. It is safer for the government to avoid borrowings by increasing tax revenue. 3. Encouraging savings and investment:
Since developing countries has mixed economy, care has also to be taken to promote capital formation and investment both in the private and public sectors. Taxation policy is to be directed to raising the ratio of savings to national income. 4. Reduction of inequalities in income and wealth:
Through reducing inequalities in income and wealth by using a efficient tax system, government can encourage people to save and invest in productive sectors. 5. Acceleration of Economic Growth:
Tax policy may be used to handle critical economic situation like depression and inflation. In depression, tax is set to increase the consumption and reduce the savings to increase the aggregate demand and vice verse. Thus the tax policy may be used to strengthen incentives to savings and investment. 6. Price Stability:
In under developed countries, there is another role to maintain price stability to ensure growth with stability. 7. Control mechanism:
Tax policy is also used as a control mechanism to check inflation, consumption of liquor and luxury goods and to protect the local poor industries from the uneven competition. Taxation is the only effective weapon by which private consumption can be curbed and thus resources transferred to the state. Thus the economy can ensure sustainable development. Thus it can be said that the economic development of a country depends various reasons one of them are on the presence of an effective and efficient taxation policy. 8. Productive use of available resources:
There are four factors of production, land, labour, capital and organization. among them tax system can be so designed as to cause remarkable effect on labour and capital to significant way. Tax system may provide incentive for better work condition and intensive use of capital. Further, as per macro objective, government can prefer development of certain sectors and discourage others. Through, tax incentives of various nature the preferred sectors can be encouraged and vice-versa. All these can contribute towards desired rate of economic growth and economic development of a country. 9. Contribution towards budget fund:
The most important source of national revenue budget is taxation. In fact, economic growth everywhere is co-related with budget. it is natural that higher income can support large budget and the larger the budget the wider is the fiscal scope restricting consumption, influencing demand-supply and allocating factors of production. In this way through financing and chain reaction taxation can play a significant role in the economic development of a country.
After finishing this assignment successfully, we have learnt the canon of taxation, the various tax systems in Bangladesh and the implementation of canon in the tax system of Bangladesh and how tax can play vital role for socio-economic development. So, for development of our country we should paid regular tax & contribution to make beautiful country of Bangladesh.
Taxes on income; profits and capital gains (% of revenue) in Bangladesh: The Taxes on income; profits and capital gains (% of revenue) in Bangladesh was 19.26 in 2009, according to a World Bank report, published in 2010. Taxes on income, profits, and capital gains are levied on the actual or presumptive net income of individuals, on the profits of corporations and enterprises, and on capital gains, whether realized or not, on land, securities, and other assets. Intra governmental payments are eliminated in consolidation. This page includes a historical data chart, news and forecasts for Taxes on income; profits and capital gains (% of revenue) in Bangladesh.
World Bank Indicators - Bangladesh - Government finance:
| Previous| Last|
Highest marginal tax rate; corporate rate (%) in Bangladesh | 30.0| 30.0| Cash surplus/deficit (current LCU) in Bangladesh | -62959155000.0| -52165392000.0| Cash surplus/deficit (% of GDP) in Bangladesh | -1.3| -1.0| Central government debt; total (current LCU) in Bangladesh | | | Central government debt; total (% of GDP) in Bangladesh | | | Net incurrence of liabilities; domestic (current LCU) in Bangladesh | 115106337000.0| 225871868000.0| Net incurrence of liabilities; domestic (% of GDP) in Bangladesh | 2.4| 4.1| Net incurrence of liabilities; foreign (current LCU) in Bangladesh | 23751668000.0| 62132831000.0| Net incurrence of liabilities; foreign (% of GDP) in Bangladesh | 0.5| 1.1| Grants and other revenue (current LCU) in Bangladesh | 119888591000.0| 141186170000.0|
Collection Efficiency of Tax Administration
Particulars| 2003-04| 2004-05| 2005-06| 2006-07| 2007-08| FY04 to FY08 Average| Expenditure:| | | | | | |
Direct Taxes| 471.5 | 491.2 | 581.0 | 692.1 | 731.0 | 593.4| Indirect Taxes| 1,220.9 | 1,240.5 | 1,682.6 | 1,657.6 | 1,805.0 | 1,521.3| NBR Head Office| 2,162.9 | 2,175.6 | 2,185.3 | 2,668.9 | 3,169.2 | 2,472.4| Total| 3,855.3 | 3,907.3 | 4,448.9 | 5,018.6 | 5,705.2 | 4,587.1| Tax Collection:| | | | | | |
Direct Taxes| 50,011.5 | 58,274.7 | 74,449.4 | 90,500.5 | 121,882.2 | 79,023.7| Indirect Taxes| 211,926.2 | 240,769.9 | 265,797.1 | 281,692.7 | 352,474.4 | 270,532.1| NBR Head Office| n/a| n/a| n/a| n/a| n/a| n/a|
Total| 261,937.7 | 299,044.6 | 340,246.5 | 372,193.2 | 474,356.6 | 349,555.7| Cost per Tk. 100 Taxes:| | | | | | |
Direct Taxes| 0.94| 0.84| 0.78| 0.76| 0.60| 0.75 |
Indirect Taxes| 0.58| 0.52| 0.63| 0.59| 0.51| 0.56 | NBR Head Office| n/a| n/a| n/a| n/a| n/a| n/a|
Total| 1.47| 1.31| 1.31| 1.35| 1.20| 1.31 |
The Complexities in the Tax Laws – Why and how costly?
The argument in favour of the difficulty contained in the tax regulations might be understood from the following quote:
People think taxation is a terribly mundane subject. But what makes it fascinating is that taxation, in reality, is life. If you know the position a person takes on taxes, you can tell their whole philosophy. The tax code, once you get to know it, embodies all the essence of life: greed, politics, power, goodness, charity. Everything’s in there. That’s why it’s so hard to get a simplified tax code. Life just isn’t simple. —Former IRS Commissioner Sheldon Cohen, quoted in Jeffrey H. Birnbaum and Alan S. Murray (1987), Showdown at Gucci Gulf (vide McCaffery, 2002, p. 112).
Slemrod and Bakija (2000) have mentioned, from the US perspective, the reasons responsible for making the tax system complex as follows: “The desire to achieve equity and fairness provides one set of reasons. Attempts to encourage certain activities deemed socially or economically desirable provide another. Sometimes, purely political factors appear to be responsible” (Slemrod and Bakija, 2000: 139).
In our income taxation system, the graduated tax rates for non-corporate taxpayers are for ensuring equity, exemptions and tax deductions are often provided for encouraging socially desirable activities. But many issues, particularly the imposition of restriction on amount and conditionalities for business tax deductions, might be purely for introducing ‘expediency’ and another undisclosed objective of raising the revenue with a pressure for achieving the tax target by tax circles/zones that is given through budget.